3 years out, cement would be a great pocket to be invested in: Viraj Mehta

You have started the practice of holding the AGM of your PMS on the lines of Mr Buffett’s Berkshire Hathaway. You do follow value investing closely. How was the attendance this time and what were the key message you shared beyond the portfolio on market with your investing circle and clients?
We had our third AGM this year. We started the practice way back when we started the fund in 2016. Unfortunately, physical AGMs were not possible in the last two years due to the Covid restrictions that we have had. But this year, we had the highest attendance ever. Obviously our fund has also grown to a significant size compared to earlier years but I was very pleased in terms of having a lot of investors who have seen the good times with us. The last six-eight months have not been great and we are still trying to think of a much longer term picture.

So, I am seeing that change vis-à-vis my perception of how a lot of investors would react to a 15-20% drawdown, but it was an extremely pleasant experience to have more than a 100 people at our AGM participate actively and ask us questions about what we think and our message to them was simple. We will continue to do what we have been doing for the past six years and what has worked for us in the past six years.

We have consistently bought good businesses at very reasonable prices and that reasonable price has to be there for us to make significant returns for our investors and that could be due to any reason – either the stock is under researched today, undiscovered or it may be going through temporary pain. We will continue to do that and today there are far more stocks to look at than we have had in the last 18 months.

How are you looking at the valuations in the light of one of the biggest worry for Indian market – elevated crude price? All the other industrial commodities have come down, crude has not. It was kind of sticky around $125 and now it is at $108. Do you see valuations come to attractive levels in the light of mild improvement in macros?
So I would put it only as a mild improvement. Three types of commodity baskets exist; one is metals, be it ferrous, non-ferrous, industrial metals; second is the agro commodities and third is the energy basket.

Post Covid, due to the money printing, the first to move up was metals and industrial basket. The next to move up was the agro commodities and the last to move up was the energy basket. We think even in the fall due to the demand destruction, it was in the same order. We had the ferrous and the non-ferrous metals falling first, then we had agro commodities falling significantly – 20-25% – and we are finally starting to see crude correct.

If you think about how these things pan out globally, the demand of goods to services in developed nations has gone up significantly in the last 18 months to close to three times and it has already fallen to below two times goods to services demand. In India, none of this demand was inflated, only the margins were subdued for a lot of these companies. That was because of the global goods demand. Once that normalises, as a country our margins and our macros should look extremely good going forward.

How have you been using this fall in the midcap, smallcap side of your portfolio? I am sure domestic flows have been positive and a lot of investors must be doing top-ups, etc. Where have you been looking for value and deploying these additional flows?
We do not really change our investing philosophy day to day. We find probably three or four opportunities in a year. Right now, there is a lot of value in companies where the margins have been hit in near term but the overall business remains solid and those segments can include things like cement which has the significant negative valuation that can include and you may see a three to six months pain.

I think three years out, cement would be like a great pocket to be invested in. So be it cement, be it auto ancillaries which are hit due to steel prices, be it capital goods which are hit due to metal prices, be it actually food companies which were hit due to high palm oil or high wheat ,prices, be it a biscuit maker or a chips manufacturer or discretionary guys who are making washing machines or any of these guys who are using raw material which was globally traded but at prices which were set by Indian customers saw a significant damage to their margins but the top line remained pretty steady. I think from Q2 onwards you will also see margins of some of these improving and by Q3, Q4 we will go back to normalised margins especially like Q4 for lot of these guys.

Reading all the data points, looking at indicators, do you think on a portfolio level, the market will be at a much better position 12 to 24 months far out? Have most things got priced in in the last 10 months of ongoing correction?
I think it is a little difficult to say that, Generally most of the things get priced in, a part of it obviously gets priced in but we do not know things get much worse before they get much better. Whenever we have seen a significant correction in small and midcaps and even on the larger companies to the tune of 20-30-35-40%, for the next 24 months return always tends to be positive and in some cases it tends to be more than 25% CAGR.

So at least historically, there is a strong precedent that after we have such a fall, if all hell does not break loose and to be honest I do not see a reason for that to happen, we see significant up move in a two-year timeframe. That is what 30-year data points suggest.